Expected Utility Without Linearity: Distinguishing Between Prospect Theory and Cumulative Prospect Theory

Lasse Mononen
Additional contact information
Lasse Mononen: Center for Mathematical Economics, Bielefeld University

No 728, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University

Abstract: We reconsider the foundations of expected utility without assuming the linearity of the independence axiom. We consider a decision-maker who cancels out common outcomes when comparing a pair of lotteries with the same probability tree. We show that if the decision-maker is consistent with first-order stochastic dominance or topological continuity in weak convergence, then the decision-maker is an expected utility maximizer. This offers a simple method to differentiate behavior between prospect theory, canceling out common outcomes in pairwise comparisons, and cumulative prospect theory, satisfying first-order stochastic dominance. Additionally, this offers a novel method to test technical continuity assumptions based on their behavioral content that rules out, e.g., prospect theory.

Keywords: Expected utility; branch cancellation; first-order stochastic dominance; testing axioms; prospect theory; cumulative prospect theory (search for similar items in EconPapers)
Pages: 55
Date: 2025-08-14
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://pub.uni-bielefeld.de/download/3006148/3006149 First Version, 2023 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bie:wpaper:728

Access Statistics for this paper

More papers in Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University Contact information at EDIRC.
Bibliographic data for series maintained by Bettina Weingarten ().